RRD Beats Q2 Earnings and Rev Estimates - Analyst Blog

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R.R. Donnelley & Sons Co. ( RRD ) reported second quarter 2013 non-GAAP earnings of 45 cents per share, a couple of cents better than the Zacks Consensus Estimate. However, earnings per share declined 8.2% year over year, primarily due to modest revenue growth and margin contractions.

Quarter Details

Quarterly revenues were up 1.7% year over year to $2.57 billion, comfortably beating the Zacks Consensus Estimate by $30.0 million. The year-over-year growth was primarily driven by incremental revenues from acquisitions and an increase in logistics volume.

Product revenues declined 2.5% from the year-ago quarter, which was fully offset by a better-than-expected year-over-year growth of 28.8% in services revenues.

U.S. Print and related services revenues inched up 2.4% from the year-ago quarter to $1.89 billion, primarily driven by higher revenues from acquisitions. On an organic basis, revenues declined 0.4% as higher price erosion fully offset volume improvement.

Donnelley's logistics business recorded robust organic revenue growth of 14.0% on a year-over-year basis, primarily driven by incremental revenues from acquisitions. Double-digit volume growth helped premedia revenues to grow 15.0% organically. Book directory and variable print unit organic revenues declined 2.4% and 0.6%, respectively in the quarter.

International sales remained almost flat year over year at $680.8 million. On an organic basis, revenues declined 2.0% due to lower volume in business process outsourcing. Organic growth (mid-single digits) in Europe and Canada improved in the quarter, while Asia continued to post higher volume, which more than offset price declines.

Donnelley's gross margin for the quarter contracted 20 basis points ("bps") on a year-over-year basis to 23.3% due to negative impact of higher pass-through postage revenues related to the Presort solutions business.

Adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") margin declined 80 bps from the year-ago quarter primarily due to lower pension income and negative impact of higher pass-through postage revenues related to the Presort solutions business.

Selling, general & administrative expenses as a percentage of revenues increased 50 bps from the year-ago quarter, which was attributed to higher investments in IT activities and lower pension income. Depreciation and amortization expense decreased 50 bps year-over-year to 4.3% in the quarter.

As a result, operating margin contracted a modest 30 bps on a year-over-year basis to 7.5%. Donnelley reported net income margin of 3.2% compared with 3.5% in the year-ago quarter.

Balance Sheet and Cash Flow

Donnelley exited the quarter with $354.4 million in cash versus $302.9 million in the previous quarter. Long-term debt was at $3.24 billion versus $3.51 at the end of the previous quarter. Total liquidity was $1.34 billion, while gross leverage was 2.9X at the end of the second quarter.

Free cash flow in the quarter was $107.3 million, a solid increase of $94.0 million from the year-ago quarter, driven by lower use of working capital and lower required contributions to pensions and other post-retirement plans.

Guidance

Donnelley reiterated its fiscal 2013 guidance. The company expects revenues to be in the range of $10.1 billion to $10.3 billion. The guidance assumes approximately $100.0 million negative impact from foreign exchange rates and lower paper sales.

Adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") are expected to be in the range of 11.2% to 11.4% for fiscal 2013. Depreciation and amortization is expected to be in the range of $450.0 to $460.0 million, while interest expense is likely to be in the range of $250.0 to $255.0 million.

Capital expenditure is expected to be in the range of $200 million to $225 million and free cash flow in the range of $400 million to $500 million. Long-term gross leverage is projected to be in the range of 2.25X to 2.75X.

Recommendation

We believe that Donnelley will achieve growth in fiscal 2013 due to its strong product pipeline. Moreover, an improving macro-economic condition in the domestic market and cost cutting initiatives will boost profitability in the near term. Donnelley's improving liquidity position is also a positive catalyst in our view.

Additionally, Donnelley's continued focus on acquisitions will extend its offerings beyond the traditional market. Donnelley's multi-million dollar contract wins from various companies such as Williams-Sonoma ( WSM ) and Office Depot Inc. ( ODP ) are the other positive catalysts.

However, we expect Donnelley to remain under pressure in the near term due to continuing pricing pressure, volatility in raw material prices, and increasing competition. Moreover the increasing adoption of the e-book reader from the likes of Amazon ( AMZN ) remains a major concern for its legacy printing business.

Currently, Donnelley has a Zacks Rank #3 (Hold).



AMAZON.COM INC (AMZN): Free Stock Analysis Report

OFFICE DEPOT (ODP): Free Stock Analysis Report

DONNELLEY (RR) (RRD): Free Stock Analysis Report

WILLIAMS-SONOMA (WSM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: AMZN , ODP , RRD , WSM

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